Q2 2024 nVent Electric PLC Earnings Call
Good day and welcome to the nVent Second Quarter 2024 Earnings Conference Call. All participants will be in lesson only mode.
Unknown Attendee: conference call. All participants will be in lesson only mode.
Unknown Attendee: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. Tony Riter, Vice President, Investor Relations
Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star then 1 on your telephone keypad.
To which are your questions, please press start and choose. Please note, this event is being recorded. I would now like to turn the conference over to Tony Riter, Vice President, and Dr. Relations. Please go ahead.
Tony Riter: Thank you. Welcome to nVent's second quarter 2024 earnings call. On the call with me are Beth Wozniak, our Chair and Chief Executive Officer, and Sara Zawoiski, our Chief Financial Officer. Today we'll provide details on our second quarter performance, an outlook for the third quarter, and an update to our full year 2024 outlook. Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risk and uncertainties, such as the risks outlined in today's press release and nVent's filings with the Securities and Exchange Commission. Such forward-looking statements are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. However, actual results could differ materially from anticipated results.
Tony Riter: Thank you, and welcome to nVent's second quarter 2024 earnings call. On the call with me are Beth Wozniak, our Chair and Chief Executive Officer, and Sara Zawoiski, our Chief Financial Officer.
Speaker Change: Today we'll provide details on our second quarter performance, an outlook for the third quarter, and an update to our full year 2024 outlook.
Speaker Change: Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risk and uncertainties, such as the risks outlined in today's press release and nVent's filings with the Security and Exchange Commission.
Tony Riter: Poor looking statements are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.
Tony Riter: Today's webcast is accompanied by a presentation, which you can find in the investors section of nVent's website. References to non-GAAP financials are reconciled in the appendix of the presentation. We will have time for questions after our prepared remarks. With that, please turn to slide three, and I'll now turn the call over to Beth. Thank you, Tony.
Tony Riter: Actual results could differ materially from anticipated results.
Tony Riter: Today's webcast is accompanied by a presentation, which you can find in the Investors section of nVent's website.
Tony Riter: References to non-GAAP financials are reconciled in the appendix of the presentation.
Tony Riter: We will have time for questions after our prepared remarks. With that, please turn to slide three, and I will now turn the call over to Beth.
Beth Wozniak: Thank you, Tony, and good morning, everyone. It's great to be with you today to share our strong second quarter results. We continue to execute on our strategy for growth with a focus on high-growth verticals, new products, geographic expansion, and acquisition. In the second quarter, we delivered record sales of 10% and adjusted EPS of 6%. Our strong execution resulted in another quarter of margin expansion, double-digit adjusted operating income growth, and robust free cash flow. Overall, we are pleased with our first half performance and are raising our full-year sales guidance. Last week, we announced an agreement to sell our thermal management business.
Beth Wozniak: Thank you, Tony, and good morning, everyone. It's great to be with you today to share our strong second quarter results.
Beth Wozniak: We continue to execute on our strategy for growth with a focus on high growth verticals, new products, geographic expansion, and acquisitions.
Beth Wozniak: In the second quarter, we delivered record sales of 10% and adjusted EPS up 6%.
Tony Riter: Our strong execution resulted in another quarter of margin expansion, double-digit adjusted operating income growth, and robust free cash flow. Overall, we are pleased with our first-half performance and are raising our full-year sales guidance.
Tony Riter: Last week, we announced an agreement to sell our thermal management business.
Beth Wozniak: We also closed on the TRAC-D acquisition in July, marking our seventh acquisition for nVent. These moves are part of our portfolio transformation, which is making nVent a more focused and higher growth electrical connection and protection leader. This further positions nVent with the electrification, sustainability, and digitalization trends.
Tony Riter: We also closed on the TRAC-D acquisition in July , marking our seventh acquisition for nVent.
Tony Riter: These moves are part of our portfolio transformation, which is making nVent a more focused and higher growth electrical connection and protection leader. This further positions nVent with the electrification, sustainability, and digitalization trends.
Beth Wozniak: Now on to slide four for a summary of our second quarter performance. Sales in the quarter were up 4% organically, led by infrastructure and industrial. New products contributed over 3 points to sales growth, and we launched over 50 new products in the first half. Adjusted operating income grew 12% year-over-year, with return on sales up 40 basis points, on top of a 540 basis point improvement last year. Adjusted EPS grew 6% on top of 35% a year ago.
Tony Riter: Now, on to slide four, for a summary of our second quarter performance.
Tony Riter: Sales in the quarter were up 4% organically, led by infrastructure and industrial. New products contributed over 3 points to sales growth and we launched over 50 new products in the first half.
Tony Riter: Adjusted operating income grew 12% year-over-year, with return on sales up 40 basis points, on top of a 540 basis point improvement last year.
Tony Riter: Adjusted EPS grew 6% on top of 35% a year ago.
Beth Wozniak: We generated an impressive $112 million of free cash flow, up over 80%. We are on track for another strong year. In addition, I am very proud of the numerous awards and recognitions we continue to receive. We were certified as a great place to work for the third consecutive year.
Tony Riter: We generated an impressive $112 million of free cash flow, up over 80%. We are on track for another strong year.
Tony Riter: In addition, I am very proud of the numerous awards and recognitions we continue to receive.
Tony Riter: We were certified as a great place to work for the third consecutive year.
Beth Wozniak: We recently earned the designation of recognized employer in the 2024 VETS Indexes Employer Awards for our work supporting veterans and military families. And we're excited to share that nVent earned a top score on the Disability Equality Index. We were recognized by Disability Inn as the best place to work for disability inclusion in the United States.
Tony Riter: We recently earned the designation of Recognized Employer in the 2024 VETS Indexes Employer Awards for our work supporting veterans and military families.
Beth Wozniak: These awards are a reflection of the great work of our nVent team members. Looking at performance across our key verticals, infrastructure led the way up high single digits organically, with data solutions growing strong double digits. Industrial and Energy each grew mid-single digits, while Commercial Resi declined low single digits with continued end-market softness. Turning to organic sales by geography, all key geographic regions grew, led by North America up mid-single digits, Europe grew modestly, led by thermal management, and Asia Pacific had strong broad-based growth. Lastly, organic orders in Q2 declined year over year due to the timing of data solutions orders.
Tony Riter: These awards are a reflection of the great work of our nVent team members.
Tony Riter: Looking at performance across our key verticals, infrastructure led the way up high single digits organically, with data solutions growing strong double digits.
Tony Riter: Industrial and Energy each grew mid-single digits. Commercial Resi declined low single digits with continued end-market softness.
Tony Riter: Turning to organic sales by geography, all key geographic regions grew, led by North America up mid-single digits, Europe grew modestly, led by thermal management, and Asia-Pacific had strong broad-based growth.
Tony Riter: Lastly, organic orders in Q2 declined year over year due to timing of data solutions orders. Adjusting for this, orders grew low single digits. Importantly, in July we saw significant orders in data solutions.
Beth Wozniak: Adjusting for this, orders grew low single digits. Importantly, in July, we saw significant orders in data solutions. Looking ahead, from a vertical perspective, we continue to expect infrastructure to have the strongest growth in 2024. We expect continued strength and data solutions in both power and cooling. Industrial, we also expect to be positive. Commercial remains soft, and we anticipate it to be flat, with residential being down.
Tony Riter: Looking ahead, from a vertical perspective, we continue to expect infrastructure to have the strongest growth in 2024. We expect continued strength in data solutions in both power and cooling.
Tony Riter: Industrial, we also expect to be positive. Commercial remains soft, anticipating it to be flat, with residential being down. In energy, we expect growth driven by the energy transition.
Beth Wozniak: In energy, we expect growth driven by the energy transition. For guidance, we are raising our full-year sales outlook, reflecting our first half performance and the addition of TROC-D. We are maintaining our full-year organic sales range and the midpoint of our adjusted EPS rate. Overall, I'm very proud of our nVent team and how we continue to execute and deliver for our customers and shareholders. We're on track for another strong year. I will now turn the call over to Sara for further detail on our second quarter results and our updated outlook for 2024. Sara, please go ahead.
Tony Riter: For guidance, we are raising our full-year sales outlook, reflecting our first-half performance and the addition of TROC-D. We are maintaining our full-year organic sales range and the midpoint of our adjusted EPS range.
Tony Riter: Overall, I'm very proud of our nVent team and how we continue to execute and deliver for our customers and shareholders. We're on track for another strong year.
Tony Riter: I will now turn the call over to Sara for further detail on our second quarter results and our updated outlook for 2024. Sara, please go ahead.
Sara Zawoyski: Thank you, Beth. We had a strong second quarter with record sales, margin expansion, and robust free cash flow. Let's turn to slide five to review our results. Record sales of $888 million were up 10% relative to last year, or up 4% organically, volumes contributed four points to growth, and price was essentially flat. Acquisitions added $52 million to sales, or six points to growth. Foreign exchange was a slight headwind. Second quarter adjusted operating income was $202 million, up 12%, with incrementals of 27%, return on sales was 23%, up 40 basis points year-over-year. Inflation was roughly $25 million in the quarter.
Sara Zawoiski: Thank you, Beth.
Sara Zawoiski: We had a strong second quarter with record sales, margin expansion, and robust free cash flow. Let's turn to slide 5 to review our results.
Sara Zawoiski: Record sales of $888 million were up 10% relative to last year, or up 4% organically. Volumes contributed 4 points to growth, and price was essentially flat.
Tony Riter: Acquisitions added $52 million to sales or 6 points to growth. Foreign exchange was a slight headwind.
Sara Zawoiski: Second quarter adjusted operating income was $202 million, up 12%, with incrementals of 27%.
Tony Riter: Return on sales was 23%, up 40 basis points year-over-year. Inflation was roughly $25 million in the quarter.
Sara Zawoyski: Q2 adjusted EPS was $0.82, up 6%, and in line with our guidance. This included a two cent contribution from the ECM acquisition. We generated impressive free cash flow in the quarter of $112 million, up 81%, reflecting our strong operational performance. Now please turn to slide six for discussion of our second quarter segment performance. Starting with enclosures, the team delivered another outstanding quarter.
Tony Riter: Q2 adjusted EPS was $0.82, up 6% and in line with our guidance.
Tony Riter: This included a two-cent contribution from the ECM acquisition.
Tony Riter: We generated impressive free cash flow in the quarter of $112 million, up 81%, reflecting our strong operational performance.
Tony Riter: Now, please turn to slide six for discussion of our second quarter segment performance.
Tony Riter: Starting with enclosures, the team delivered another outstanding quarter.
Sara Zawoyski: Sales of $441 million increased 10%. The Texa acquisition added two points to sales, and organically, sales increased 9%. This included over 10% volume growth with price slightly down. From a vertical perspective, infrastructure led up double digits with strength and data solutions in both power and cooling. We also saw growth in commercial and industrial. Geographically, North America led, up low double digits.
Tony Riter: Sales of $441 million increased 10%. The TEXA acquisition added two points to sales. Organically, sales increased 9%. This included over 10% volume growth with price slightly down.
Tony Riter: From a vertical perspective, infrastructure led up double digits with strength and data solutions in both power and cooling. We also saw growth in commercial and industrial. Geographically, North America led up low double digits.
Sara Zawoyski: Enclosure's second quarter segment income was $104 million, up 15 percent. Return on sales of 23.5 percent increased 100 basis points year-over-year, driven by strong growth and execution. This was on top of a 630 basis point improvement a year ago. Moving to electrical and fastening, sales of $299 million increased 12%. The ECM acquisition contributed 17 points to sales growth, and as of mid May, it is now in our organic results. However, organic sales were down 5%, reflecting positive price and lower volume.
Tony Riter: Enclosure's second quarter segment income was $104 million, up 15%. Return on sales of 23.5% increased 100 basis points year-over-year, driven by strong growth and execution.
Tony Riter: This was on top of a 630 basis point improvement a year ago.
Tony Riter: Moving to electrical and fastening, sales of $299 million increased 12%. The ECM acquisition contributed 17 points to sales growth, and as of mid-May is in our organic results.
Tony Riter: Organic sales were down 5%, reflecting positive price and lower volumes.
Tony Riter: As expected, infrastructure declined due to customer and channel inventory normalization and a strong prior year comparison.
Sara Zawoyski: Commercial resi was down due to softer commercial and ECM resi sales. With our solid first half performance and the Troxie acquisition, we are raising full year reported sales growth guidance to 11 to 13 percent versus 8 to 10 percent previously. We continue to expect organic growth in the range of 3 to 5 percent, including positive price and strong volume for the year. And we now expect acquisitions to contribute approximately eight points to growth.
Tony Riter: Commercial Resi was down due to softer commercial and ECM Resi sales.
Tony Riter: Geographically, organic sales declined in North America and Europe , while Asia-Pacific was up.
Tony Riter: Electrical and Fastening Segment Income was $92 million, up 7% year-over-year. Return on Sales was a solid 30.9%, down 150 basis points mainly due to lower volumes and sales mix.
Tony Riter: Turning to thermal management, sales of $141 million were up 4% organically. Price and volume each contributed 2 points.
Tony Riter: Growth was led by industrial with continued strength in MRO. In addition, backlog grew year-over-year and sequentially, with energy transition now representing nearly half of the project backlog.
Tony Riter: Geographically, growth was led by Europe and Asia-Pacific.
Tony Riter: Thermal management segment income of $28 million was down 2%. Return on sales of 19.9% was down 110 basis points year-over-year, impacted mainly by sales mix due to projects.
Speaker Change: On slide 7, titled Balance Sheet and Cash Flow, we had a strong free cash flow in the quarter, delivering $187 million year-to-date.
Tony Riter: We ended the quarter with $270 million of cash on hand and $600 million available on our Revolver. In mid-July, we drew on a new term loan and the Revolver to fund the $695 million tract deacquisition.
Tony Riter: Turning to slide 8, where we outline our capital allocation priorities.
Tony Riter: Growth remains our first priority, both organic and inorganic, with a balanced and disciplined approach to capital allocations to deliver strong returns.
Tony Riter: We are increasing investments in new capacity in liquid cooling to support the growing backlog in 2025 and beyond.
Tony Riter: On inorganic, Protracti, we expect full year sales of approximately $250 million, return on sales of roughly 20%, and over $5 million of run rate cost synergies.
Tony Riter: Like our prior deals, we expect Trofty to exceed our weighted average cost of capital by Year 3.
Tony Riter: And lastly, we have returned $64 million in dividends in the first half to shareholders.
Tony Riter: Our balance sheet is in good shape, cash flow is strong, and we expect to have nearly $2 billion available for capital deployment in 2025 from cash generated and anticipated net proceeds from the thermal management sale.
Tony Riter: Moving to slide nine in our full-year outlook.
Tony Riter: With our solid first half performance and the Troxie acquisition, we are raising full-year reported sales growth guidance to 11 to 13 percent versus 8 to 10 percent previously.
Tony Riter: We continue to expect organic growth in the range of 3-5% including positive price and strong volume for the year.
Tony Riter: And we now expect acquisitions to contribute approximately 8 points to growth.
Tony Riter: We are maintaining the midpoint of our adjusted EPS range by narrowing the range to $3.23 to $3.29, up 6% to 8%, versus our prior guidance of $3.22 to $3.30.
Tony Riter: A couple of updated modeling assumptions to note. First, adjusted operating income is expected to be up 13-15% versus 10-12% previously.
Tony Riter: Second, full year net interest is now expected to be approximately $110 million versus $90 million previously, both reflecting the impact of the TRACTI acquisition.
Tony Riter: For clarity, we have left thermal management in our full year and Q3 outlook due to the recent signing of the sale agreement and timing of regulatory approvals.
Tony Riter: We expect to move thermal management to discontinued operations when reporting our Q3 earnings results and plan to recast our historical financials and guidance at that time.
Sara Zawoyski: For modeling purposes, we expect thermal management 2024 growth to be in line with overall Invent organic sales guidance. Turning to our third quarter outlook on slide 10. We believe this is a positive move for both thermal management and nVent. These control buildings are essentially larger enclosures, and within them, there are even more enclosures and other products that nVent provides. The demand for control houses is increasing with an aging electrical infrastructure that needs upgrading.
Tony Riter: For modeling purposes, we expect thermal management's 2024 growth to be in line with overall invent organic sales guide, margins to expand, and tax rate of approximately 23 percent.
Tony Riter: Turning to our third quarter outlook on slide 10.
Tony Riter: We expect reported sales to grow eight to ten percent with acquisitions contributing approximately six points to sales.
Tony Riter: Organic sales are expected to be up two to four percent. This reflects more modest growth in enclosures and electrical and fastening turning positive.
Tony Riter: We expect adjusted EPS to be between $0.80 and $0.82, which includes increased investments in data solutions as we bring new capacity online and make investments in engineering and R&D, as we have previously discussed.
Tony Riter: Wrapping up, I am pleased with our second quarter performance and believe we are well positioned for another strong year. This concludes my remarks and I will now turn the call back over to Beth.
Beth Wozniak: Thank you, Sara. Turning to slide 11.
Speaker Change: Our strategy has remained consistent, and we are executing on the core elements focused on high growth verticals, new products, global expansion, and acquisitions.
Speaker Change: As part of our strategy, we are transforming to higher growth verticals, which includes the acquisition of Procti.
Speaker Change: And we believe the announced sale of the thermal management business will make us a more focused and higher growth company.
Beth Wozniak: Moving to slide 12, I'd like to give more detail about the planned sale of the thermal management business.
Beth Wozniak: Last Thursday, we announced that we entered into a definitive agreement to sell thermal management for $1.7 billion, subject to customary adjustments.
Beth Wozniak: This transaction is expected to close by early 2025 and we plan to deploy the net proceeds from the sale to acquisitions and share repurchases.
Beth Wozniak: We believe this is a positive move for both thermal management and nVent.
Beth Wozniak: Thermal management is a great business with a strong team, and the sale will enable Thermal to further build on its leading positions and differentiated solutions to drive growth across its verticals and expand with the energy transition.
Beth Wozniak: For nVent, the sale represents a significant step.
Speaker Change: consistent with our ongoing strategy to becoming a higher growth and more focused electrical connection and protection leader while positioned with the megatrends of electrification, sustainability, and digitalization.
Beth Wozniak: Turning to slide 13.
Speaker Change: We recently closed on our acquisition of Trocty, a leading manufacturer of custom engineered control building solutions designed to protect critical infrastructure assets.
Speaker Change: If you look at the pictures on the chart, these control buildings are essentially larger enclosures, and within them are even more enclosures and other products that nVent provides.
Beth Wozniak: The demand for control houses is increasing with an aging electrical infrastructure that needs upgrading, a need to expand the overall grid, the move to more renewable energy, and the increase in data centers.
Speaker Change: The addition of TROCTI further strengthens our solutions in high-growth verticals with approximately 85% of its sales in power utilities, data centers, and renewables.
Speaker Change: The business has been growing strong double digits with a robust backlog, giving us visibility into 2025.
Sara Zawoyski: This is a great strategic fit for nVent and provides us with a new platform that we can build on with significant growth potential. On slide 14, you'll see an overview of nVent's portfolio transformation since the company was formed in 2018. Our acquisition framework starts with finding companies that have great products aligned to high-growth verticals with the ability to scale and invest for growth. We have a strong acquisition track record. With the trustee and thermal portfolio moves, we're expecting our exposure to secular trends to be more than 70% compared to 60% two years ago.
Beth Wozniak: This is a great strategic fit for nVent and provides us with a new platform that we can build on with significant growth potential.
Speaker Change: On slide 14, you'll see an overview of nVent's portfolio transformation since the company was formed in 2018.
Speaker Change: Our acquisition framework starts with finding companies that have great products aligned to high growth verticals with the ability to scale and invest for growth. We have acquired seven companies to date, adding more than $850 million to sales. We have a strong acquisition track record.
Speaker Change: With the tracty and thermal portfolio moves, we're expecting our exposure to secular trends to be more than 70% compared to 60% two years ago.
Beth Wozniak: Infrastructure is expected to be about one-third of our sales. This transformation positions us for higher growth and long-term value creation. We are building a more sustainable and electrified world.
Sara Zawoyski: We had another strong quarter with record sales, margin expansion, and robust cash flow. We continue to execute well on our strategy as we transform our portfolio to have a greater emphasis on infrastructure and secular trends. We are raising our full-year sales guidance and adjusted operating income.
Speaker Change: Wrapping up on slide 15.
Speaker Change: We had another strong quarter with record sales, margin expansion, and robust cash flow.
Speaker Change: We continue to execute well on our strategy as we transform our portfolio to have a greater emphasis on infrastructure and secular trends
Speaker Change: We are raising our full year sales guidance and adjusted operating income.
Speaker Change: We believe we're well positioned with the electrification, sustainability, and digitalization trends. Our future is bright.
Speaker Change: With that, I will now turn the call over to the operator to start Q&A.
Speaker Change: We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key.
Unknown Attendee: If at any time your question has been addressed and you'd like to withdraw your question, please press star, then choose. At this time, we'll pause momentarily to assemble a roster.
Speaker Change: If at any time your question has been addressed and you'd like to withdraw your question, please press star, then choose. At this time, we'll pause momentarily to assemble a roster.
Speaker Change: [inaudible]
Speaker Change: The first question comes from Julian Mitchell from Barclays. Please go ahead.
Julia Mitchell: Hi, good morning.
Julia Mitchell: Maybe just the first question around that up-profit bridge on slide five. So if we look at sort of net productivity and price combined, I suppose they're minus five million or so year-on-year in Q2.
Unknown Attendee: and sort of gross price in revenue is slattish in the quarter. So I just wondered, sort of for the balance of the year, how should we think about the gross price effect in sales? and then also what that sort of price net productivity number is likely to be in our profit.
Unknown Attendee: That's very helpful. Thank you.
Speaker Change: From a second half perspective, we do expect pricing to continue to be modest, you know, here in the back half.
Speaker Change: I think the other thing I would call out is we did expect the investments to ramp, you know, through the course of the year. You know, you're seeing that in the first half in R&D being higher as a percentage of sales.
Unknown Attendee: And then maybe just one follow-up, as you mentioned, Q3, Sara, so I think normally the seasonality of invent is that EPS is, you know, up sequentially in Q3 and then down in Q4 sequentially. But looking at your guide for this year, it looks like it's the other way around. So you've got the EPS down sequentially in Q3 and then up sequentially in Q4. I don't think that's the tracty deal because that's EPS neutral.
Julia Mitchell: you know, up sequentially in Q3 and then...
Unknown Attendee: So is it something to do with that phasing of the investment spend in the third quarter versus the fourth or something else moving around? No, I think it would be just the investment spend in terms of Q3.
Unknown Attendee: No, I think it would be just the investment spend in terms of Q3 versus Q4. I think the other thing to call out is just the timing of the data solutions, you know, as revenue drops in overall. We're seeing a little bit more of that in Q4 versus Q3.
Unknown Attendee: The next question comes from Deane Dray from RBC Capital Markets. Please go ahead.
Deane Dray: Thank you. Good morning, everyone. Good morning.
Deane Dray: Hey, I love seeing the divestiture of thermal. That's exactly the kind of simplification initiative that we were looking for. Can you give me some organizational implications here? What's the bias on the proceeds between M&A and buyback? And for the Trakey acquisition, what are the implications of when you say it's a new platform? So, you know, where might there be some white space adjacencies around that? Thanks.
Speaker Change: I love seeing the divestiture of thermal. That's exactly the kind of simplification initiative that we were looking for. Just some organizational implications here. What's the bias on the proceeds between M&A and buybacks?
Beth Wozniak: Okay, Deane, I'll take that. So, on the thermal sale, we expect that sale to complete in early 2025. And as I stated in my prepared remarks, we said we expected the net proceeds to be used for acquisitions and share repurchases. And I think our capital allocation strategy has always been that we prioritize growth first, both organic and inorganic. And with acquisitions, you never quite control the timing.
Speaker Change: And I think our capital allocation strategy has always been that we prioritize...
Beth Wozniak: So that's why we believe if we have some available cash, we will have some opportunity for share repurchases. On the TROC-D acquisition, when we talk about it being a new platform, I made the comment that it really is just a larger enclosure. This is not an area where we have played with enclosures previously, and so it is a new type of enclosure for us, serving different end markets that we've maybe not served fully before.
Speaker Change: [inaudible] So that's why we believe if we have some available cash that we will have some opportunity for share repurchases.
Speaker Change: On the Procty Acquisition, when we talk about it being a new platform,
Speaker Change: And I made the comment that it really is just a larger enclosure. This is not an area where we have played with enclosures previously, and so it is a new type of enclosure for us, serving different end markets that we've maybe not served fully before.
Beth Wozniak: We think we can build on this as a platform in several ways. One, we believe we have product pull through because, as I commented, there are more enclosures inside that enclosure and other products. And two, we also see the opportunity to expand this type of enclosure offering into other verticals. So we've talked previously about battery energy storage, and that's an area where we believe our liquid cooling solutions can play. And now having a larger enclosure for putting together a solution there, we think we can have an extension of that platform. As well as, I believe there are other M&A opportunities there that we could add to this area. So we think it's a great acquisition, a great fit, and there is more growth potential for us there.
Speaker Change: We think we can build on this as a platform in several ways.
Speaker Change: One, we believe we have product pull-through because, as I commented, there's more enclosures inside that enclosure and other products.
Speaker Change: To we also see that opportunity to expand this type of enclosure offering into other verticals
Speaker Change: So we've talked previously about...
Speaker Change: Battery Energy Storage, and that's an area where we believe our liquid cooling solutions play, and now having a larger enclosure for putting together a solution there, we think we can have an extension of that platform.
Speaker Change: As well as I believe there's other M&A opportunities there that we could add on in this area. So we think it's a great acquisition, a great fit, and more growth potential for us there.
Beth Wozniak: That's really helpful. And then there's the second question regarding liquid cooling. And we appreciate the update on all the investments that you're making in order to increase capacity by 4x. And it begs the question, there are two questions.
Speaker Change: That's really helpful. And then second question regarding liquid cooling, and we appreciate the update on all the investments that you're making in order to increase capacity by 4x.
Beth Wozniak: One is how much, based upon existing demand, how far out does that capacity serve you? I know it's, there's been some recalibration about growth rates, but just what's your sense of how far that takes you out? And then another question we're getting related to liquid cooling is some announcements by other players looking to enter in some way liquid cooling. Could you give us a sense of what the barriers to entry are?
Speaker Change: There's been some
Speaker Change: recalibration about growth rates, but just what's your sense of how far does that take you out?
Beth Wozniak: And specifically, when we see an announcement from a big equipment manufacturer saying they're developing proprietary liquid cooling, what we don't know is that, behind the scenes, you all may very well be partnering with them, and you're certainly not going to name names of customers, but just give us that perspective when we see announcements from other players looking to get into liquid cooling. I know that there's a lot to unpack here, but thank you. Okay. So starting with capacity, you know, some of that capacity
Speaker Change: What we don't know is, behind the scenes, you all may very well be partnering with them, and you're certainly not going to name names of customers, but just give us that perspective about when we see announcements of other players looking to get into liquid cooling. I know that there's a lot to unpack there, but thank you.
Beth Wozniak: Okay, so starting with capacity, some of that capacity is coming online, and as you know, we've already expanded some space in our Minnesota facility and moved out a distribution center, so we're working on that through this year and into next year, and I think that capacity, our view right now is that takes us through 26, maybe into 27, and who knows? It's very dynamic, but we think that will serve us for the next couple of years well, and we When we think about the overall cooling landscape, I think, you know, you see lots of different players, from startups to those that are already in that space, entering the cooling area, and I think that should be as expected because the demand is there.
Speaker Change: So starting with capacity, some of that capacity is coming online, and as you know, we had already expanded
Speaker Change: 26 maybe into 27 and who knows we'll see it's very dynamic, but we think
Speaker Change: that will serve us for the next couple of years as well, and we'll continually look at efficiencies and where else we need to expand. And we have done some other expansion in some of our other existing footprint, I might add as well.
Speaker Change: When we think about the overall cooling landscape, I think, you know, you see lots of different players, from start-ups to
Speaker Change: those that are already in that space entering into the cooling area. And I think that should be as expected because the demand is there, you know, we know that these new
Beth Wozniak: You know, we know that these new GPU chips require cooling, so I think you're going to see various entrants and partnerships, and we've done that ourselves over the last couple of years. I think what really matters is the ability to have scale and proven solutions, and I think our portfolio, we've been working at this pre-spin, that we continue to develop new products and new offerings and continue to push ourselves on that, and are making investments in R&D.
Speaker Change: GPU chips require cooling, so I think you're going to see various entrants and partnerships.
Speaker Change: and we've done that ourselves over the last couple of years.
Speaker Change: I think what really matters is the ability to have scale and proven solutions and I think our portfolio, we've been working at this pre-spin that we continue to develop new products and new offerings and continue to push ourselves on that and are making investments in R&D. So I think overall that
Beth Wozniak: So, I think overall that space is just going to grow, and we're going to see many different entrants, and, you know, we feel very confident in our solution and our ability to grow at the rates that we've been growing at.
Speaker Change: space is just going to grow, and we're going to see many different entrants. And, you know, we feel very confident in our solution and our ability to grow at the rates that we've been growing at.
Dean: Thank you. Thanks, Deane.
Nigel Coe: The next question comes from Nigel Coe with Wolf Research. Please go ahead.
Speaker Change: The next question comes from Nigel Coe with Wolf Research. Please go ahead.
Nigel Coe: Thanks. Good morning, everyone.
Sara Zawoyski: Thanks for the question. Going back to 4Q seasonality, I think Sara, you called out the data solutions dynamics in the back half of the year. Is there an unusually large quarter lined up for 4Q, or is it more? 3Q shipments are pushing to 4Q. Just want to understand that shift between 3Q and 4Q. And then maybe, I think you mentioned EFS going back to growth in the third quarter. Just want to make sure that's correct.
Speaker Change: Thanks. Good morning, everyone. Thanks for the question.
Nigel Coe: Going back to the 4Q seasonality, I think, Sara, you called out the data solutions dynamics in the back half of the year. Is there an unusually large quarter lined up for 4Q?
Nigel Coe: 3Q shipping is pushing the 4Q just want to understand that that shift between 3Q and 4Q and then maybe I think you mentioned EFS back to growth in third quarter just want to make sure that's correct
Sara Zawoyski: So yes, a couple things there. So EFS is back to growth in Q3, yes, that's our expectation. You know, they'll largely have some of those infrastructure headwinds behind them that Beth articulated. But we also see some of those ECM sales synergies that we've been talking about beginning to kind of build as we exit the year more in Q4 and into 2025. In terms of the Q3 to Q4 dynamic, again, I think the biggest thing there is just the level of investments that we expect to see here in Q4.
Speaker Change: So yes, a couple things there. So EFS back to growth in Q3, yes, that's our expectation. You know, they'll largely have some of those infrastructure headwinds behind them that Beth articulated. We also see, you know, some of those ECM sales synergies that we've been talking about beginning to kind of build as we exit the year more in Q4 and into 2025.
Speaker Change: In terms of the Q3 to Q4 dynamic, again, I think the biggest thing there is just the level of investments that we expect to see here in Q4, and that should taper, I'm sorry, here in Q3, and that should taper, you know, a bit into Q4. And then the other thing is just in terms of timing of the data solutions customer programs. You know, we saw
Sara Zawoyski: And that should taper, I'm sorry, here in Q3. And that should taper, you know, a bit into Q4. And then the other thing is just in terms of timing of the data solutions, customer programs, you know, we saw great growth and contribution there in the first half; we continue to expect, you know, good growth here in 2024 overall, on track to exceed that greater than $500 million in data solutions for the full year. It's just there are some timing elements here that pushes more of that into Q4 versus Q3. So those are the two things mainly that are impacting that Q3 to Q4 dynamic.
Speaker Change: Great growth and contribution there in the first half. We continue to expect, you know, good growth here in 2020.
Speaker Change: 24 overall on track to exceed that greater than 500 million in data solutions for the full year. It's just there's some timing elements here that pushes more of that into Q4 versus Q3. So those are the two things mainly that are impacting that Q3 to Q4 dynamic.
Speaker Change: Thanks. And then just on the negative 1% price in enclosures, how do you see that developing in the back half of the year? I think you mentioned flat pricing for the full year. Just curious.
Speaker Change: If we hone in on enclosures back half of the year, are we seeing deepening price deflation pressures in the back half? And how do we think about the data solutions portion? Would that be deflationary as well, or is this more sort of the core enclosures pricing?
Speaker Change: So just to clarify, you know, for overall nVent, we still expect positive price for the year. And again, coming into the year, we said, you know, we expect more modest, you know, price and much more volume. And that's how we're seeing it play out here in the first half. And that's how we would, again, expect it to play out for the back half.
Speaker Change: Next slide, please. So, you know, from a pricing dynamic and specifically, you know, across the segments, two out of the three, right, have positive price here in Q2 and specifically for enclosures, you know, what's going to impact, you know, any given, you know, price across the segments is going to be the mix of products, the mix of projects.
Speaker Change: And again, the new products would not be included in that year-over-year price. Data solutions, to the extent it's a new product, you know, it wouldn't necessarily show up in that pricing line.
Speaker Change: To the extent it's a program that's continuing on, that would be something that would show up in that overall price line. So again, in the back half, we expect overall modest price, consistent with generally the first half of what we saw.
Speaker Change: Mortis Price for Total nVent.
Speaker Change: for Total line VENT.
Speaker Change: The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Joe Ricci: Thanks. Good morning, everybody. Morning.
Joe Ricci: Hey, can you guys maybe touch on the diverging trends that you're seeing in the infrastructure and market across both EFS and enclosures and whether trends like change dramatically as the quarter progressed?
Speaker Change: Sure, I think one of the things that we stated both in our
Speaker Change: Our last earnings call and also saw through Q2 is just some of the.
Speaker Change: in the utility and telecom areas where.
Speaker Change: Lead times have come in and there have been some inventory adjustments in the channels. So that largely played out in our EFS business from Q1 to Q2.
Speaker Change: So that's what we've seen there. On the other hand, I would say data solutions continue to be very strong for both
Speaker Change: and EFS. So we saw very strong Q2 as we did for Q1. So those would be the two major things that I would say, both positive and on the other side where it was softer.
Beth Wozniak: And Beth, maybe on those inventory adjustments in EFS, do you think we're through those adjustments at this point? What's your expectation then for volumes picking up into the back half of the year?
Beth Wozniak: Well, as we, as Sara already noted, we do expect EFS to grow in Q3.
Beth Wozniak: So we start to, we expect that some of that is those adjustments working their way out as well as some other strength and some, you know, other opportunities that we see in infrastructure.
Speaker Change: Okay, fair enough. And lastly, look, congratulations on the portfolio changes that you're making. I recognize that you're expecting to deploy capital both to M&A and buyback, I guess.
Speaker Change: As you're thinking about the potential dilution from the thermal business, is that going to kind of sway your capital deployment priorities, given what you know about your M&A pipeline today?
Speaker Change: You know, I would say it doesn't change our priorities because these are long-term priorities and so Certainly as we get to 2025 when the sale concludes, we'll see where we're at in terms of acquisitions and other opportunities but I think
Beth Wozniak: Our long-term capital allocation priorities and strategy does remain the same. Growth first, followed by other areas of dividend and share repurchases.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Jeff Hammond with KeyBank. Please go ahead.
Jeff Ramon: All right, good morning. Good morning.
Jeff Ramon: So, I just want to come back to, I guess, two end markets, commercial construction and utility. I know you had talked about destocking and utility, but it does seem like there's some incremental weakening and just kind of a finer point on what you're seeing in those two end markets.
Speaker Change: Yeah, I think what we've seen in utility has really been, um...
Speaker Change: The long-term trends are good, but there are certainly, because of lead times on different components, including some of the things that we have, like ground rods, we just saw lead times have improved.
Speaker Change: significantly year over year. And so last year there was a period of a lot of
Beth Wozniak: channel, you know, acquiring inventory and having longer lead times. And so that's just working its way out. But I'd say the overall prospects for the utility, renewable, all of those end markets remains very positive.
Speaker Change: And commercial construction, thank you. And commercial construction, I would say we've seen that soft. And so as we've gone through, you know, particularly we see that in EFS. So we have seen that market tend to be a little soft at this point.
Sara Zawoyski: Okay, and then good to hear you're building backlog into 25 in the data center business. Can you just speak to, is that around, you know, lead times starting to build out? Or is that just, you know, pacing of long-term projects?
Speaker Change: Okay, and then good to hear you're building backlog into 25 in the data center business. Can you just speak to, is that around, you know, lead times starting to build out or is that just, you know, pacing of long-term projects?
Speaker Change: And just on liquid cooling, I think your focus maybe near term has been with the hyperscalers but just any new progress on, you know, getting product more standardized and through the distribution channel.
Speaker Change: So, when it comes to our backlog for 2025, this is how some of those programs are just laying out and customer preferences, and they're also bringing their capacity online, and recall we're also ramping in terms of just having more capacity. So, it's all of those things, and as new programs go into 2025.
Speaker Change: When it comes to our overall portfolio, we have been developing more standardized offerings. And so when we look at some of our CDUs, even some of our manifold capability that we're creating some more standardized products.
Beth Wozniak: that can be used for various different solutions. So, that's an important part of our strategy is to have solutions that can also be sold through to enterprise or through system integrators and through our distribution channel partners. And so, that's in progression as well.
Speaker Change: Okay, thank you, Beth. Thank you.
Nicole DeBlase: The next question comes from Nicole DeBlase from Deutsche Bank. Please go ahead.
Speaker Change: The next question comes from Nicole DeBlase from Deutsche Bank. Please go ahead.
Nicole DeBlase: Yeah, thanks. Good morning, guys. Good morning.
Nicole DeBlase: Can we just go through the outlook for EFS margins in the second half? I think there was, you know, still a bit of an impact from M&A dilution in the quarter, and I think that that rolls off. So, is it possible that we could see EFS margins turn positive with revenue?
Speaker Change: So I think we still expect EFS margins to be muted, you know, here in Q3, and I would just say in Q2 and Q3 of last year, we saw really strong sort of, I would say, elevated return on sales north of 32%, and at that point in time, just based on
Speaker Change: Got it, okay, that's clear. And then I know thermal's not going to be around for much longer, but just curious if we could talk about the margin outlook for thermal in the back half too, as well as what drove the year-on-year decline in margins in the second quarter. I think you guys might have expected a little bit of growth, thanks.
Speaker Change: The biggest factor for that Q2 return on sales performance was the project sales mix dynamics. And if we look in the back half, you know, Beth alluded to this in her prepared remarks.
Nicole DeBlase: Thank you. I'll pass it on.
Speaker Change: You know, what you see is your key priorities for the business, you know, in the first few months and quarters here and any potential quick wins you see in terms of synergies.
Beth Wozniak: Well, always when we acquire a company, we want to ensure that we are positioning it for growth. And so, you know, certainly, as I mentioned, Trachty has a very strong backlog, so we want to ensure that we can execute on that backlog. At the same time, we're trying to identify the synergies, particularly in the early days, looking at cost synergies, whether that's through sourcing, et cetera, or indirect spend. So we work on those things, as well as integrate them into our overall company processes and make people feel very welcome and part of nVent. So I think, you know, it's too early to say early wins because it's just been several weeks. But for us, it's just ensuring that we start to identify synergies.
Beth Wozniak: Well always are when we acquire a company is we want to ensure that we are positioning it for growth
Speaker Change: And so, you know, certainly, as I mentioned, TRACTI has this very strong backlog, so we want to ensure that we can execute on that backlog. At the same time, we're trying to identify the synergies, particularly in the early days, looking at cost synergies, whether that's...
Speaker Change: Sourcing, etc. or indirect spend. So we work on those things as well as integrate into our overall company processes and And making people feel very welcome and to be part of nVent
Speaker Change: So, I think, you know, too early to say early wins, because it's just been several weeks. But for us, it's just ensuring we start to identify.
Speaker Change: The growth synergies right so where there's product pulled through whether there's opportunity for us to Expand through different different customer segments or end markets and those usually take longer, but we work really hard in the early
Speaker Change: months of the integration to identify those opportunities and work on them.
Speaker Change: Great. That's really helpful. Appreciate it. And then just last one from me. Any comments or comments on potential stranded costs that we should think about with the thermal divestiture?
Speaker Change: You know, how we go to market, you know, from a marketing standpoint, you know, how we show up from a OneInvent digital standpoint, these are things that, you know, as we think about this going forward with the two segments, electrical and fastening, and with enclosures, you know, we also believe we can go a lot faster, you know, on some of these initiatives to drive underlying productivity, you know, but also better customer experiences, better supplier experiences, as well as employee experiences.
Speaker Change: Great.
Unknown Attendee: Hi, good morning. Thanks for taking my questions. The first one is, about a week ago, there were some concerns that surfaced in the market about potential generative AI overinvestment that spooked the market, and stocks with that type of exposure were down big.
Speaker Change: Hi, good morning. Thanks for taking my questions. The first one is, about a week ago, there were some concerns that surfaced in the market about a potential generative AI overinvestment and, you know, spooked.
Unknown Attendee: I'm just wondering, you know.
Speaker Change: The market and you know stocks with that type of exposure are down big. I'm just wondering you know
Speaker Change: How your expectation for growth in the data solutions business in 2024 has evolved throughout the year?
Speaker Change: You know, you're seeing the real demand, I mean, you've got the, you know, the boots on the ground, so to speak, and seeing really what's going on in that market. I was just wondering if you could talk a little bit more about what you're hearing from your major data center customers and how the intensity and pace of their projects has developed throughout the year.
Beth Wozniak: I think the comment that I would have there is that everyone is moving forward on their strategy with respect to AI and building that capacity and capability. Certainly, one of the things that we understand is when one of the chip manufacturers announced that their new chips had higher heat loads, that had some customers re-looking at their system architectures and whether they had the right cooling and power infrastructure.
Speaker Change: higher heat loads. That had some customers re-looking at their system architecture and whether they had the right cooling and power infrastructure. And so, you know, as a result, these are always dynamic things that we see. And sometimes that creates different projects being moved or accelerated or changed as a result of different heat loads, which I think is a natural progression. So it's very dynamic in that standpoint, but I think the long-term perspective here is there's investment going in.
Beth Wozniak: As a result, these are always dynamic things that we see, and sometimes that creates different projects being moved or accelerated or changed as a result of different heat loads, which I think is a natural progression. It's very dynamic from that standpoint, but I think the long-term perspective here is there's investment going in. We've seen very strong growth through the first half of the year, and we do expect to see that continue.
Speaker Change: We've seen very strong growth through the first half of the year, and we do expect to see that continue. And we've talked about building our backlog as we go forward into 2025. So I think it's like any new technology, there's a lot of...
Beth Wozniak: We've talked about building our backlog as we go forward into 2025. I think it's like any new technology. There's a lot of excitement around it, and it's going to scale, and we'll see it continue to grow for the next several years.
Unknown Attendee: ??
Speaker Change: excitement around it. And, you know, it will, it's, it's going to scale and we'll see it, you know, continue to grow for the next several years.
Speaker Change: Thank you. And then, just following up on that,
Speaker Change: I think earlier in the Q&A, you reaffirmed the expectation for $500 million or more in the data solutions business in terms of revenue for 2024.
Speaker Change: But I'm just curious if you could put a finer point on on what the growth expectation is for for data solutions and maybe specifically power cooling your power and cooling in 2024.
Speaker Change: Well, we've always said that power and cooling were going to grow faster, although sometimes we often see our cable management growing at that same rate.
Speaker Change: But I think Sara might have commented, we expect it to be over $500 million of revenue and we've seen very strong double-digit growth through the first half and, you know, expect full year that'll remain very robust.
Speaker Change: Okay, thank you.
Speaker Change: Once again, if you have a question, please press star then 1. The next question comes from Scott Graham with Seaport Research. Please go ahead.
Scott Graham: Good morning. I have a couple of questions for you. First, you've got some things going in and out of debt, obviously, in the next six months. Could you give us an idea what proforma net leverage looks like post-thermal?
Speaker Change: The $2 billion that I referenced in my prepared remarks is really suggesting that, look, if you take, you know, just the free cash flow that we generate, you know, plus, you know, the net proceeds that we talked about, that roughly $1.4 billion, that gets us $2 billion of cash, you know, to go deploy and, you know, create, you know, great returns and shareholder long-term value there. So I think that's the way we kind of frame it up and look at it just in terms of that capital deployment to go deploy.
Sara Zawoiski: Appreciate that, Sara. Thank you. On the orders, could you just kind of re-walk us through that a little bit? You know, the organic and then the organic minus the thermal and what we get back maybe in thermal in the third and fourth quarter. Could you help us on that a little bit more?
Speaker Change: Well, um, let me just talk to your orders as we said through Q2 that...
Sara Zawoiski: [inaudible]
Speaker Change: Nice order growth there. We expect that to continue with the energy transition for EFS. We had positive orders
Speaker Change: For enclosures, we had a little bit of this dynamic of some significant data solution orders year over year, but as we look through July , we had some...
Sara Zawoiski: That also was very positive, and I would just say overall for nVent...
Sara Zawoiski: orders across all three segments through July have been good.
Sara Zawoiski: So, you know, I'm not sure, you know, the comment specific to thermal other than we think thermal is on a really good trajectory right now and has a really nice backlog and some momentum behind it.
Sara Zawoiski: This concludes our question and answer session. I would like to turn the conference back over to Beth Wozniak for any closing remarks.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: © BF-WATCH TV 2021 © BF-WATCH TV 2021
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